Tuesday, 3 March 2015

Budget 2015 - Plug the Loophole

The government should give more incentives to first-time home-buyers and stop limit-free deduction for second properties.

Keeping Budget 2015 in mind, tax experts are of the opinion that interest deduction for first-time home-buyers should be enhanced and the limit-free deduction on a second home purchase should be stopped to bring in much-needed revenues for infrastructure development and curtail the inflow of black money in multiple properties.

To achieve the government’s target of housing for all by 2022, the focus should be on ensuring that first-time home-buyers should be given maximum incentives to encourage them to invest. Under Section 24B of the Income Tax Act, the maximum deduction allowed is ` 2 lakh. This limit was raised from `1.5 lakh in last year’s Budget. Interestingly, there is no cap on the interest limit for a second property, which encourages people to make a second purchase. Many of them then claim losses on vacant property. This happens more often if the rent they receive for the property is lesser than the interest they claim to pay for such properties.

According to Sonu Iyer, partner and national leader, Human Capital Services, EY (Ernst and Young), a vacant second house is generally deemed as rented out with the rent attracting tax. However, in most cases the interest deduction amount on the property is higher than the notional rent, which the property owner usually shows as loss - which is an undue benefit, say tax experts. “One of the proposals that the government should consider in Budget 2015 is not to tax a property on a deemed basis. This will not only prevent claim for loss on vacant property, it will also bring in additional revenues,” says Iyer.

Also, in case of pre-construction interest, a person is allowed to avail of the interest deduction benefit only after possession and that too on amortized basis over five years subject to overall cap of `2 lakh, which includes interest payable for the relevant tax year. For instance, if pre-construction interest is `10 lakh, which means amortized interest of `2 lakh over five years and interest payable in first year after possession is `1 lakh, you can claim deduction only for `2 lakh and not for `3 lakh

This is unfair as in most cases property possession is delayed. “Taxation laws should treat pre-construction loan interest as a separate item of amortized deduction outside the cap of ` 2 lakh. Don’t cheat the customer of his right to deduction. In most cases, projects are delayed, and the customer is not able to avail of entire pre-construction interest deduction,” she adds.

In many cases people buy two properties, both for self-use. One is at the place where they work and the other is in their home towns as they want to stay connected to their roots. At present, one can only claim one property as self-occupied, eligible for nil rental value. The government can propose that the two properties be treated as self-occupied, says Iyer.

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